Get Rich Education 249: Beginner's Real Estate Investing Guide
Two big mistakes are: 1) Renting out your former primary residence. 2) Only being invested in one market.
This Beginner's Real Estate Investing Audio Guide also helps you step-by-step with buying an income property:
- Credit Scoring
- Mortgage Pre-Approval
- Writing An Offer
- Inspection
- Vetting A Property Manager
- Appraisal
- Insurance
- Closing
- LLCs
**The entire audio from this episode is transcribed into words and can be found at the end.**
People set up LLCs for asset protection, anonymity, or tax purposes. But there is a lot of administrative work. Is it even worth setting up?
Your FICO credit score has five ingredients. Down payment, debt-to-income ratio covered.
Mortgage pre-approval is better than pre-qualification.
Select income property in: job-growth economies, high rent in proportion to low purchase price.
Cash flow = Rent Income minus "VIMTUM".
Why would someone sell you a cash-flowing property?
"Turnkey" defined. Should you make a lowball offer to a turnkey provider?
Also discussed: Negotiation Strategy, Earnest Money, Purchase Contracts, Management Fees, Management Agreements, Mobile Notary, Title Company, Rent-To-Value Ratio, Collecting Cash Flow.
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Complete Audio Transcript:
Welcome to Get Rich Education. I'm your host Keith Weinhold and I'm here to help Beginning Real Estate Investors Today.
The biggest beginner mistakes to avoid, when you make an offer - can you lowball a turnkey provider, and all those buyer steps like LLCs, mortgage pre-approval, inspection, appraisal, and closing. Today, on Get Rich Education.
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Welcome to GRE. This is Get Rich Education Episode 249 - and this is your Beginner's Real Estate Investing Audio Guide. Hi, I'm your host Keith Weinhold.
We're talking about how to get into long-term buy & hold RE investing - and that's because it's the most generationally-proven way to build wealth.
First, let's talk about a couple of the biggest mistakes that real estate investors make - it's being invested in only one geographic market. Often, that's the market that they just happen to live in.
There is more risk with being in only one market than most realize, because you're now tied to the fortunes or misfortunes of just one area's economy.
Another substantial, common real estate investor mistake is that they continue to hold onto one - I'll call it - special - property in their portfolio that they usually need to get rid of - but they have either sentimental ties to it - or they just hold onto it for convenience, and do you know what that property is?
I'm actually talking about a specific property here.
It's the home that THEY YOU USED TO LIVE IN yourself. Well, what's wrong with renting out the home that you used to live in yourself?
You might still have the preferable owner-occupied financing locked in on that one - and afterall, that's a better rate than you could get on a non-owner-occupied rental.
The problem is that the property probably doesn't perform BEST as a rental.
But you might be clearing, say $500 per month by using your former primary residence as a rental today.
Look, for you, it's often about the cash flow - and yes, it is about the cash flow.
But there's something even more important than cash flow - that's because nearly any property will cash flow if the loan were paid off.
That's why it's really more specifically about the rent-to-value ratio of a property.
If you're renting out the home that you used to live in, and it wasn't strategically bought as a rental, if your rent-to-value ratio (or RV ratio) is 0.6%, meaning that for every $100K in value it has, you're only getting $600 of monthly rent income, then you're losing cash flow dollars every year - and every month.
Look, let's give a real life example of the .6% RV ratio. Say that you can get $1,800 rent out of that $300K property that you used to live in.
But instead, three $100K homes bought strategically as rentals can have a combined rent income of $3,000. Yes, you can still find that full 1% rent-to-value ratio.
So it's either one $300K property at $1,800 of rent income.
Or three $100K properties at $3,000 of rent income.
So you're losing $1,200 dollars of cash flow every month - you're only getting $1,800 rather than $3,000 - by not buying and owning strategically in markets in the Midwest and South where the properties make sense as a RENTAL on the day that you buy it.
Your primary residence only made sense as a primary residence on the day that you bought it.
Now you can see that the only reason that you own it, is because you defaulted and "fell" into it. Don't fall into things. Be intentional.
You are a better investor when you're intentional rather than emotional.
It's even better for you now. Beyond your $1,200 of additional cash flow with some repositioning, now, with three properties instead of one - now you've also taken care of the first real estate investor mistake that I mentioned.
WITH three rentals rather than one, now you can be diversified across multiple markets.
Two birds are killed with one stone. Now with some re-positioning, you've increased your cash flow by $1,200, AND you're in multiple markets. One property isn't divisible.
We're talking about real estate investing for beginners today, so let me clearly guide you through step-by-step on just how you go about buying your first property - writing an offer, inspection and vetting your Property Manager which is known as due diligence, appraisal, and onto closing and receiving cash flow from the tenant.
As you'll see, much of today's show pertains to any investment property at all.
But we're talking mostly about how to buy single-family turnkey homes, especially homes outside your home market - as most of the best deals are not found where you live.
Like they say, the best investors live where they want to live, invest where the numbers make sense.
Get Rich Education is heard in 188 world nations.
Today's content is primarily geared toward United States real estate investors - but those that live outside the United States will benefit here too.
Here's a question that you might have - "How do I go about setting up an LLC - a Limited Liability Company - to hold my investment property in?"
I'll tell you - I don't think "How do I set up an LLC?" is the best question to ask.
The best question to ask is, "Should I set up an LLC?"
The three main reasons people set up an LLC are for either anonymity, tax purposes, or asset protection.
Now, if you know that you WANT to set up an LLC - I've done three episodes on that topic with Rich Dad Legal Advisor Garrett Sutton.
You can go to GetRichEducation.com, type "Garrett Sutton" in the search bar, and those three episode numbers will appear so that you can listen.
But the reason that the question is, "Should I even SET up an LLC?" is because:
- Setup of LLCs complicates your life. Maintaining a registered agent, Articles Of Incorporation, having separate accounts, tracking expenses with separate credit cards, paying annual fees for everything - depending on how many LLCs you have and how you structure your life - it can wear you out.
- The second reason you should ask yourself, "Should I even set up an LLC?" is because you might not have many assets for a litigant to go after. Retirement accounts have certain protections already. Equity in a property could be low-hanging fruit for a plaintiff attorney if someone gets a judgement against you. But since the Return From Equity is always zero, what would you have much equity in a property anyway?
- The third reason you should ask yourself, "Why should I even set up an LLC?" is that frivolous or slip-and-fall type of lawsuits are rare. Not only have I never been a party to one, I've never even heard of any investor friend or associate having one - and I talk to a lot of people. You probably haven't heard of one either.
Now, note that I'm not saying you can't get an LLC or shouldn't get one. I'm saying, prioritize those questions to yourself.
First, it's "Should I get one?". If that's a definitive "yes", only THEN ask:
"How do I set one up?"
Why do you think you have to? Did some attorney use fear tactics to get you to?
If the result of the LLC's administrative overburden provides a greater reward in the form of asset protection, anonymity, or tax benefit - which is typically a flow-through taxation type anyway, you might then … get an LLC.
So, as a beginning real estate investor, understand that real estate is a credit-based asset - meaning it's usually bought with a loan.
So let's talk about getting your finances in order before you contact a lender or select an income property.
That begins with you having enough cash liquidated for a 20% down payment on the property - add about 4% for closing costs, depending on the state that you're buying your property in - and on the lowest-priced property that's still in a decent area of a low-cost city - which might be a $60,000 property …
24% of that then is about $14,000 that you'll need. You should have some extra on top of that as reserves.
Now, let's look at another part of your finances - your DTI - your debt-to-income ratio. It cannot exceed 43% to 45% - maybe up to 50% in some circumstances.
So if your monthly minimum debt payments - everywhere in your life - housing payment, minimum credit card payments, minimum car payment - if that sum is $5,000 and your gross monthly income is $10,000 - that's a 50% DTI. You can't exceed that.
Of course, before a bank is willing to loan you money, they want to have a reasonable assurance that you aren't weighed down with debt elsewhere because their fear factor goes up that they won't get paid back.
Next, let's talk about your credit score. We dedicated an entire episode to this back in Episode 54. If you can remember back that far, Philip Tirone was here with us and you learned more about credit scores that you probably ever thought you would …
… and he even went on to call the credit scoring system a total scam. He was quite opinionated - it was interesting and eye-opening, but ...
Playing within the scam here - as it might be.
There are many different credit scoring models, but the FICO Score - F-I-C-O - is a respected one that you're probably going to see your mortgage lender use.
It stands for Fair Isaac Company.
Their credit scoring range is 300 - the worst, up to 850. 850 is essentially a perfect score.
Importantly, 740 is the highest score that helps you here.
If you have a 782 or an 836, it doesn't help you qualify for the loan or get you a lower mortgage interest rate or anything else.
740 is where you're optimized.
Now, just a quick overview of FICO credit scoring ...
There are five primary ingredients that make up your credit score.
In order of importance, they are your payment history, amounts owed, length of your credit history, new credit, and finally credit mix.
That first one, Payment History, is the most heavily weighted one. It's 35% of your score.
As you might expect, the repayment of past debt is a major factor in the calculation of credit scores. It helps determine your future long-term payment behavior. Both revolving credit (i.e. credit cards) and installment loans (i.e. mortgage) are included in payment history calculations.
Although installment loans like mortgages take a bit more precedence over revolving credit - like credit cards.
This is why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.
The next way, your Amounts Owed – 30%
This category is basically credit utilization or the percentage of available credit being used - or borrowed against. Credit score formulas "see" borrowers who constantly reach or exceed their credit limit as a potential risk. That is why it's a good idea to keep low credit card balances and not overextend your credit utilization ratio.
So if you've got just a $1,000 balance on a credit card with a $10,000 credit limit, that's seen as a good ratio. You're staying well within your limits then.
The third FICO credit score ingredient is the Length of your Credit History – 15%
This factor is based on the length of time all credit accounts have been open. It also includes the timeframe since an account's most recent transaction.
Newer credit users could have a more difficult time achieving a high score than those who have a long credit history. That's because if you have a longer credit history, FICO has more data on which to base their payment history.
The fourth of five FICO ingredients is your "Credit Mix" – Now we're down to an ingredient only comprising 10% of your score.
Credit mix just means that it helps your score if you have a combination of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
Finally, "New Credit" makes up the last 10% of your FICO score.
Don't open too many new credit accounts in a short period of time. That signifies a greater risk to lenders – and that's especially true for you if you're a borrower with a short credit history.
And you sure don't want to open up any new lines of credit, down the road when you're in the qualification process for buying a new property unless you check with your Mortgage Loan officer first.
Knowing what factors make up your FICO® Credit Score can help you qualify for more loans and get better mortgage interest rates. That's the bottom line.
This helps you get pre-qualifed or pre-approved with your Mortgage Lender.
To get prequalified, you just need to provide some financial information to your mortgage lender, such as your income and the amount of savings and investments you have. Your lender will review this information and tell you how much they can lend you.
After pre-qualification, you can seek the higher-level status and that is getting pre-APPROVAL for credit. Pre-approval is better than pre-qualification.
If you think about it, it makes sense. Qualifying for anything in life is not as good as getting approved for something - I suppose.
Pre-approval involves providing your more detailed financial documents - like W-2 statements, paycheck stubs, bank account statements, and your previous two years tax returns. This way, your lender can VERIFY your financial status and credit.
Now that you're pre-approved with a lender, you can focus on the market and property that you're interested in.
RidgeLendingGroup.com is the mortgage lender that we recommend most often because they SPECIALIZE in income property. They don't have any seasoning requirements.
Seasoning means that the person selling YOU the property needs to have held onto it for a certain length of time - or the lender won't finance the property for you.
While you're in the pre-approval process, you can be learning about a cash-flowing investment market.
You want to pick a geographic metro market that typically has low-cost properties, and high rent incomes in proportion to those low costs.
In fact, the market is more important than the property. Because your income comes from your tenant, and your tenant's income comes from a job.
So you typically don't want to own much property in a town with 14,000 people that's an outlying area - not part of a greater metro - where 1/3rd of the employment is tied to one tungsten factory or even one semiconductor manufacturer.
Because now, too much of your income stream is tied to just one industry.
You also don't want to buy slummy property. Those tenants often don't pay the rent. You also don't want to buy the median-priced home or higher, because the numbers don't work out.
So you want that working class housing that's just below the median price point for the area.
If you're not already confident about that and familiar with the right provider ...
We have information on the right market, with the right provider, with properties - and they're typically in the MidWest and South - at GREturnkey.com.
So read a market report there. That's good, pointed information.
Most investors are interested in a property for the production of cash flow. That's the margin by which your rent income exceeds all expenses.
Rent income minus expenses should be a positive number.
So that's your monthly rent minus VIMTUM. V-I-M-T-U-M.
Vacancy, Insurance, Maintenance, Taxes, Utilities, and Management.
I like easy ways to remember things and VIMTUM is an easy way to remember.
So, you're listening to the Beginner's Real Estate Investing Audio Guide here as a regular episode of Get Rich Education.
If you're not a beginner & you're still listening, it's either a good review and you might even be learning some new things along the way yourself.
Including, should you ever lowball a turnkey provider and a negotiation approach that I have for that - in a few minutes.
But first, one reasonable beginner question is ...
"Now why would someone would want to sell me a cash-flowing property in the first place? Why would someone sell me a good thing that pays them every month that they could continue to hold onto for cash flow?
If a property pays someone every month while they hold onto it - why in the heck would they sell it to me?
OK, some seller out there has a golden goose that lays a golden egg every month, so why in the world would they give me an opportunity to buy the goose?
Well, there are just so many reasons for selling cash-flowing property - yes, a ton of reasons for selling even a young, healthy goose that lays golden eggs every month & is expected to so for years.
Well, a turnkey provider runs out of money too. They can't buy all the properties themselves.
They'd prefer a lump sum payout when they sell this property, because their business model is to go pay all cash for another distressed property that they can fix up.
And if you think that they snatched up the good ones themselves a while ago - yeah, they probably did do some of that.
In fact - I WANT them to have snatched up some good properties from their own market earlier. It shows me that they believe in what they sell.
Now, other reasons that the - I guess general public seller might want to sell you a property is ...
One reason is moving. Say that a family in City A owns a few mom-and-pop rental homes that they self-manage and they're moving to City B in another state, they'll often sell their income properties.
Some people want to self-manage their property (often because they never explored their best-and-highest use, but anyway) & if they have to move to City B, they'll sell the property rather than try to find a Property Manager in City A.
Another reason people sell cash-flowing property is that - even if someone is not moving, that person might be tired of the self-management hassle - but yet they don't try professional management - because that person has the DIYer mentality - that soooo common do-it-yourself mindset.
OK, most people just don't take a strategic approach to real estate investing.
Other reasons for people selling cash-flowing property are death, marriage, divorce, and all kinds of either joyous or tragic life milestones.
If a husband-and-wife own rental properties but running & managing them was kind of the husband's thing & the husband dies … the wife doesn't know how to run the properties & she's likely to sell rather than hire a Property Manager.
People may sell their cash-flowing property in case of all kinds of emergencies - medical and otherwise - because they may need a quick lump of cash - instead of the steady stream of cash flow over time that just won't work for them in their new situation.
OK, most of those situations involve some sort of external life change for property sellers - a lot of them tragic.
Well - here's a personal one for you...
A few years ago, I sold two cash-flowing apartment buildings at the same time - well, those sales actually closed on consecutive days - so nearly the same time.
Both of those cash-flowing apartment buildings that I sold were 100% occupied with tenants, I had competent management in place, and there were no deferred maintenance issues with the buildings.
You want to know my reason for selling two nice golden apartment gooses that were steadily laying some nice golden eggs?
OK...can you guess why?
Alright, fortunately I didn't have any distress or emergency in my life.
...oh, and also, I wanted to sell them fast too, I couldn't let these two cash-flowing apartment buildings linger on the market for a while. I really wanted to get rid of them.
I had no distress like those situations I mentioned earlier.
So can you guess why I wanted to sell these long-producing golden gooses in a good job growth market that produced nice cash flow, nice golden eggs?
I'll tell you why.
That's because I knew I could 1031 Exchange those two gooses for two even larger gooses. Now I won't get into the 1031 here on a beginner episode.
But I replaced the two smaller apartment buildings with two larger apartment buildings that would produce even larger eggs if I did it with a quick timeline - and I could defer any tax on my profitable gain.
I found - I guess - two very fertile egg producers that were going to produce even more cash flow over time.
So...I think you get the message here. To the buyers of my smaller apartment buildings, I appeared as a very motivated seller of cash-flowing property, even though I had no external stress in my life.
It was due to internal reasons that I wanted to sell...and it's the internal drive to expand my income.
No shrinking thinking here at Get Rich Education.
Now, when you've found a cash-flowing property that you want to buy, should you make a lowball offer to a turnkey provider? My definition of lowball here, is, a 10% discount.
We'll say, that a provider is offering a property for $120,000 - then you'd make the offer for 10% less, which is $108,000. That's a lowball.
My answer is ...
No. That's not going to work. In almost every instance, that's too much of a discount and it's going to eat their margin too much.
Depending on how it's presented, a seller might even be less motivated to work with you if they get a lowball offer.
This company has a business to run and with a turnkey property, you're typically paying for the convenience. You leveraged their systems of them delivering this product to you that's already renovated, rehabilitated, tenanted, and under management.
Now, can you can knock off $1K-$2K? And say, offer the seller then - $118K or $119K for the $120,000 property. Yeah, that might work.
It sure wouldn't be deemed some unreasonable request. But it's good to at least provide a reason - some rationale - in asking for the discount.
Let me give you some perspective on this negotiation too.
For every $1,000 less in a mortgage loan that you take out, how much do you think that saves you in a monthly payment? Did you ever figure out how much that saves you?
Well, at a 5% interest rate on a 30-year loan, reducing your mortgage loan amount by $1,000 saves you … $5. Five bucks in a reduced payment.
For more perspective, keep in mind too, that once the seller accepts your offer - it's only the first part of the negotiation.
Later, it's a negotiation with the inspection. We'll discuss how to navigate THAT shortly.
I'm Keith Weinhold. You're listening to Get Rich Education.
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Welcome back to Get Rich Education. This is your Beginner's Guide to Real Estate Investing. I'm your host, Keith Weinhold and we're talking about buying an income-producing property.
That may or may not be a TURNKEY property - which just means that it's already renovated, tenanted, and under management with a tenant on the day that you buy it.
Now, once your offer is accepted by the seller, I want to give you - really just a brief outline of what to expect next.
This isn't intended to give you every step in exhaustive detail, but this is generally what comes next for United States real estate purchases, and custom varies somewhat from state-to-state.
So with that in mind, once the turnkey provider or seller accepts your purchase offer...
You need to send in your earnest money. Earnest money is not the down payment. It's a smaller amount that shows good faith that you're serious about your offer.
It's often an amount of $5,000 or less and it shows the seller that you're serious enough about buying the property that the seller has the confidence to take their property OFF the market and not show it to anyone else.
The seller should give you instructions on how to place your Earnest Money.
Now remember, your earnest money deposit is not going directly TO the seller, it is going to a third-party escrow account, and it is refundable to you in accordance with the terms of the contract you signed.
Your contract should have an estimated closing date in there. I want to emphasize that the key word there is "estimated".
While it is important that all parties work towards closing by this date, between you and me - let's just be realistic - the reality is that many transactions get delayed beyond the closing date in the contract for a variety of reasons on the seller side, sometimes having to do with construction or renovation delays.
If this happens, it is nothing to be worried about, just remain in touch with the seller and you can simply sign a contract extension if needed when the time comes.
As you are financing your property, be sure to keep getting your lender anything that they ask you for up so that they can keep processing your loan.
As your closing gets near, they will probably ask you for some updated information and have some final stipulations from the underwriter, so just remain in close touch with your lender and try to provide them what they need as swiftly as you can.
During most of this time where you're under contract & even before you're in-contract to buy the property, most of your relationship with your lender and seller is just sitting around, waiting for the next stage.
Once construction/renovation is completed on your property, I suggest that you order a professional home inspection before closing.
As the buyer, this is at your expense, but the home inspection is cheap insurance for you and it is an important part of your due diligence. It might cost you about $300 for a single-family turnkey income property.
A four-plex inspection might cost up toward $800.
When seeking an inspector - seek ASHI certification - that is American Society of Home Inspectors.
You're looking for an inspector with a good reputation, licensed and bonded. It is good to look for a level of experience as well. The choice is really yours as the Buyer.
Your inspector points out deficiencies in what I'll break into a few categories.
#1 is Major concerns – these are significantly defective, safety issues that require immediate repair. Often times, those things MUST be done in order for your lender to even finance the property so the seller is going to do those things for you. That might be adding a railing to a porch.
The second category are recommended repairs – So they're recommended but not required. That might be adding some extra insulation in the attic.
The third category is "nice if it were done" - like a kitchen cabinet door that's a little loose and doesn't close snugly.
When you get your home inspection report back because the inspector has compiled their findings, the key to remember is that the inspector will ALWAYS return a (usually long) list of items that they recommend be corrected prior to closing.
Now, this even happens on new construction, so expect some findings.
And remember, you are not closing on the property in the condition it was inspected. Rather, the inspection is just part of the process on the path to getting the property to its final condition.
Then you and the seller agree on what will be fixed (at the sellers expense, and verified to your satisfaction), prior to closing.
The seller is anticipating that they will need to make some final repairs (at their own expense) after they get the inspection repair request from you. This is all part of the normal process.
Of course, you can get in a car or hop on a plane and visit the turnkey property yourself and walk the property with your inspector, but I'd say fewer than 10% of turnkey buyers do this.
But going to see the property in person is never a BAD idea.
Today, it's easier than ever for an inspector or provider to e-mail you a property video. The report that you get from your Home Inspector after he visited the home will have lots of photos and details.
Typically, purchase offers are contingent on a home inspection of the property to check for signs of structural damage or things that may need fixing.
This contingency protects you by giving you a chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage.
Once the seller makes any needed repairs that the third-party inspector found, I suggest having a re-inspection done by that same inspector. This gives you the chance to confirm that any agreed-upon repairs have indeed been made.
You might spend another $100 on this re-inspection.
Now, if the original inspection showed that a leaky faucet needed to be replaced, and the seller said they'd do it, and the re-inspection finds that that work wasn't done as promised, then any FURTHER re-inspection costs are often a cost borne by the seller.
Which seems pretty fair - they said they'd do work - and the re-inspection that you paid for confirmed that it hadn't been done in this case.
Now, back to the negotiation. If you asked for a reduced Purchase Price, that could lean away from you asking for too much in the inspection.
How do I like to play it? Often times, I make a full price offer for the property - and I might even let the seller know at that time that I'd like to give you your price - it's a full $120,000 in this case - and since you got your price, I'd like my terms.
My terms are - that I'm more bold in what I request the seller to do from the inspection findings.
Maybe I will ask them to add that extra insulation in the attic as one of those "Recommended buy not Required For Financing" items - or replace a window pane that had condensation inside it.
Then, what's my justification for asking the seller for that. It's that I'm paying your full price. Again, financing an extra $1,000 only costs me $5 per month.
Now, let's talk about the property appraisal.
The appraisal is a tool that the bank uses to verify the quality of their collateral.
Because in your loan paperwork, at closing, the bank will basically tell you that if you don't make your monthly payments, you'll be foreclosed upon and the bank will take back the property - that's their collateral.
So they want to make sure that the property seems to be worth as much or more than you're in contract for - that $120,000 in our example.
Your lender is the one that orders the property appraisal, not you. In about 90% of U.S. states, you as the buyer pay for the appraisal. It costs up to about $500.
The appraiser is a member of a third-party company and is not directly associated with the lender. It wasn't always that way.
In fact, one factor that led to the housing downturn of 2007 in the Great Recession is that some lenders & appraisers were "in cahoots". Haha! That can't happen anymore.
BTW, the appraisal and some of these other steps are all part of your closing costs. All part of that … about 4% of the property purchase price.
The appraisal is typically done by a certified appraiser physically visiting the home - and these people always seemingly have a tape measure with them.
The appraiser checks out the premises and their job is to use market comparables to make sure that the lender has adequate collateral in case you, the borrower, default.
OK, the bank doesn't want to lend out more than the property is worth or else they could find themselves underwater if the borrower defaults. The appraisal protects against this.
And don't confuse this appraisal with an assessment. An assessment is something that a county or municipality uses the measure the amount of property taxes that are paid. It's really unrelated to this appraisal.
Now, before you select your Property Manager, I'd really like for you to talk with them on the phone or use a free video chat service like Zoom - it's Zoom.us - it works a lot like Skype but Zoom is easier to use.
I mean, I don't make many phone calls in my life anymore - much like a lot of people. But I want you to have a phone or video call with your PM because ...
I want you to have a good vibe - a good feeling about your property manager and to vet that manager just like you would vet out a manager for a non-turnkey company.
Just because a property is branded "turnkey" by a company, doesn't mean that you can dismiss doing your due diligence. Turnkey can be a great system, but there's nothing magical about that word alone.
Don't overlook developing a good feeling about your Property Manager, because this is the one long-term relationship that you expect to have. I just can't emphasize that enough. Your Manager is one of your key team members.
They'll tell you the character of the current tenant that's currently in the home. Find out how the manager is going to pay you. Feel them out, know what your communication flow is going to be like.
If they're part of the same company, a good manager should also connect you with whom renovated your turnkey property in case you have some questions for them.
Now, notice that I haven't mentioned a real estate agent. Most turnkey providers work in a direct model so that you don't have to go through agents.
You must sign a written Management Agreement with your Property Manager.
This gives the manager written authority to manage your property for you, it will state their fees, and you'll have your contact information in that agreement.
There are typically two fees - a leasing fee and a management fee.
A leasing fee is where you'll spend ½ month's rent to one month's rent amount when the Manager screens a new tenant. So hopefully that only happens every 1 or 2 or even 5 years if you're lucky.
Yes, you can typically approve or reject their selected prospective tenant. You are going to be the owner of the property afterall.
A management fee is often 8-10% of one month's rent income - and that's what you pay monthly - ongoing.
You can sign a Management Agreement with the property provider if they have management integrated in-house. If not, you can lean on your provider for some management recommendations.
Now, there's one blank to fill in on your Management Agreement - it's a dollar amount up to which the manager can pay for expenses that come up - against your account - without contacting you.
For example, if the number $500 is written in there, that means that if a maintenance or repair expense on your property exceeds $500, they must contact you prior to incurring that expense.
You get to choose that dollar limit. As a beginning real estate investor, go with a lower figure.
Then as you get comfortable and / or you don't want to be bothered about the property as much, you can increase that dollar limit in which they need to contract you about approving maintenance or repairs.
Basically, if there's something that has to do with the property & you don't want to deal with it, then make sure it's written in the Management Agreement that the manager will perform it.
Typically, it's going to say that the manager will collect rent, handle tenant relations, respond to repair requests, send you the rent, keep your ledger of income & expenses on the property, post legal notices if a tenant is paying the rent late, and sooo many other associated duties that I personally don't want to deal with. I just want to live my life.
Get that Management Agreement done - fully executed - signed by both you & the Manager BEFORE you close on the property.
Before you close, you can buy property insurance from any provider you choose.
Your turnkey provider is often happy to recommend some providers that their other clients have used in this market, or you can just Google and find your own.
Be sure to let the insurance provider know that this is a rental property (not a primary residence where you live and not a second home).
Most turnkey buyers purchase both hazard and liability insurance as part of their policy. Like any other insurance policy, you will have choices about deductibles, monthly payments, and coverage amounts.
If you are financing your property, your lender will most likely be able to combine your property taxes and insurance into your monthly payment, so you have one monthly payment for principal, interest, taxes and insurance (PITI) … much like you would on your primary residence.
The financing process typically takes about 30 days from the time you submit your EM.
Remember that YOU are a factor in how fast your property closes. If that lender needs another document, give it to them pretty promptly.
When you have finalized your due diligence, and verified that the seller has made all the agreed upon repairs from the home inspection report, you will be ready to close.
You likely live in a different state than the property and will close remotely. The title company (or its a closing attorney in some states) will prepare your closing documents - including your loan docs...
...and can arrange for a mobile notary to meet you with the docs wherever you choose (your home, your office, your local coffee shop, etc.) so you can sign the docs in front of a notary who will then overnight the docs back to the Title Company so the transaction can fund.
Your lender will arrange for a title company to handle all of the paperwork and make sure that the seller is the rightful owner of the house you are buying.
It may seem like the closing process is a lot of work, but you'll really spend most of the time waiting. Most of the time, you'll just be sitting on your hands, waiting for someone else involved in the transaction to come through.
So find something enjoyable to occupy your time and distract you while you wait, and feel secure in the knowledge that you've done your research and know how to make your closing process go smoothly.
When you complete that closing with the mobile notary - I've done these closings at my home's dining room table, or even in my employer's conference room back when I used to have a day job - then, hey!
You need to congratulate yourself on adding another income property to your portfolio.
You know, the good news is that of all of these stages we've discussed - the longest stage of them all is your ownership of the property. You Own & Collect the cash flow.
And hey, this isn't reason enough alone - but it's kinda cool that you own property in TN and FL and IN.
You own part of each one of those states.
And with each new turnkey property you buy, you might have just increased your mostly passive cash flow by $311 per month or $118 per month or whatever it is.
If you can swing it, it can be more efficient timewise for you to buy more than one property at a time.
As you buy more income properties, it not only gets easier because you know the process, but you often get quantity discounts.
For example, a management company might charge you a 9% management fee on your first three properties, but once you own four or more, they might charge you 8% on all four rather than 9%.
Insurance companies often have similar discounts for you….so you may very well get a little more profitable as you buy more property.
A rent-to-value ratio of 1% is generally quite desirable, meaning one month's rent is 1% or more of the purchase price.
For example, a $120,000 property and a rent income of $1,200.
$1,000 rent income on a $120,000 property would probably work fairly well too.
You typically want to avoid properties with RV ratios of less than 7/10ths of 1%, or 0.75.
Let's keep in mind that the RV ratio is only a rule of thumb. It doesn't account for a major recurring expense like property taxes.
In high property tax jurisdictions like many Texas markets, you probably want that RV ratio up higher.
Now, as a beginning real estate investor, or even an advanced one, don't worry about not know it ALL. No one's ever going to know it all with real estate.
In fact, I've been actively investing in real estate since 2002 and just within the steps of ACQUIRING a property, like I carefully discussed today, some incremental half-step will come up in the process that I hadn't been thinking about previously - like signing a Lead Paint Disclosure Form.
So, you don't need to commit all of this stuff to memory.
Now, something that novice real estate investors say sometimes is something like: "I would only buy an income property that I would live in myself."
I contend that that is an awful criterion upon which to found strategic fundamentals on purchasing an income property.
Once one filters property that way, they have let their emotions trump facts.
If the fact that a clean, safe, affordable, and functional property has a good occupancy rate in a sound employment market, decent ENOUGH neighborhood, and the numbers make sense - that's more important.
OK, you aren't living there yourself so it's not a sound criterion.
Shoot, if I moved into any income property that I own, my lifestyle would take a substantial hit. Yet I'm not a slumlord - I provide housing that's clean, safe, affordable and functional.
But they're not replete with fantastic amenities, it does not have Corinthian architecture with alabaster columns - OK - but I know there's a demographic for my rental property type that demands this responsible-but-no-frills housing over time.
It's about asking yourself a better question, like, "Will this property secure an income stream?"
Alright, would you rather have your property look "cute as a button" - or secure an income stream?
OK, we're investors here.
Some think that in today's electronic age, you should be able to complete a property purchase from the time you write an offer until you close on a property in the same-day.
Well, that's certainly not true. As you witnessed, physical things need to take place because you're buying a real, physical asset.
We've been talking today about how you buy an income property - just simply that - especially as it pertains to buying an out-of-state turnkey income property - from the time that you get a property under contract and submit the earnest money to escrow all the way to closing.
...because that's how to generate passive income, which in turn, creates a rich life for you.
Again, this isn't an all-encompassing guide today with EVERY little detail. But we've hit the major milestones in the process & more.
You've got a good general guide on the income property-buying structure.
You might have learned something about prioritization - perhaps LLCs matter less than you thought and a communicative Property Manager matters more than you thought.
Today's show has the type of content that will be about as relevant 5 years from now as it does today.
Now, today is also evidence that real estate does not have the liquidity that some other investments do. It takes longer to get in & get out.
However, that low liquidity actually contributes to relative price stability in real estate. OK, there's no panic selling in real estate.
Maybe the most important thing for you to keep in mind is that...
You cannot make any money from the property that you don't own.
Your future depends on what you do today.
To "know" something and not "do" something is to really not know something.
The most important thing you can do is act...because you cannot make any money from the property that you don't own.
Again, a recommended, specific INCOME property lender is Ridge Lending Group.
Our network of income property providers is at GREturnkey.com
And one particular property provider to highlight over there is Memphis, Tennessee's Mid South Home Buyers. Not only are they great with beginners, but they have profitable properties at lower price points, which some beginners would rather start with.
MidSouth Home Buyers has been rather popular for all those reasons and that's created a longer wait list. Well, the news is that MidSouth Home Buyers has just expanded into another great investment market - Little Rock, Arkansas.
So that should help shorten their wait list.
If you can't remember those three resources - Ridge Lending Group for the loan, GREturnkey and MidSouthHomeBuyers for the properties, I'll be sure that they're the first three links in the "Resources Mentioned" portion of the Show Notes accompany this episode.
There would be nothing worse than for me to share today's knowledge with you - then not let you know where to go to act upon that knowledge.
It's been my pleasure to bring you your Beginner's Real Estate Investing Audio Guide today. If you got value from today's show, I'd be grateful if you took a screenshot of the podcast player image here on your podcatcher …
...and posted it to your Social Media account - your Facebook, Twitter, Instagram, or LinkedIn - and let your social friends know that if they're ever interested in real estate investing, this episode is a great place to start.
Next week, I'll talk about how you Retain your tenants at the same time you RAISE the rent.
I'm your host, Keith Weinhold. Don't Quit Your Daydream!